Vol 11 (2014) - Issue 6

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In-depth Reform of Spanish In-court Restructuring Procedure

On 5 September 2014, the reform of the Spanish Insolvency Law finally made the Spanish in-court insolvency restructuring process a powerful restructuring mechanism, to the extent that all creditors can now be compelled to be a party to compositions with creditors ('Composition'). Prior to the reform it was impossible to cram-down privileged (including secured) creditors. In pre-pack sales, third parties can be forced to accept the purchaser’s subrogation to the debtor’s contractual position vis-à-vis such third parties.

1. Scope and valuation of the reform
In my last article, 'Recently enacted Spanish outof- court debt restructuring laws join the current European trends for efficient restructuring and lead innovation for restructuring solutions', Vol. 11 (2014), Issue 4, International Corporate Rescue, I described and commented on the significant changes to Spanish outof- court restructuring schemes brought by the reform enacted last 7 March 2014. The progress in out-ofcourt restructuring mechanisms was so deep that the untouched in-court restructuring options were left after the reform as a less intense restructuring tool and thus with a less deep restructuring result. In this regard, the most clear example of the foregoing was that cram-down of financial secured creditors could only be achieved in an out-of-court restructuring and not in an in-court restructuring.
This article analyses the reform enacted on 5 September 2014. The reform focuses mainly on in-court restructuring tools to achieve a more effective and efficient restructuring environment than in out-of-court restructuring procedures. The general rule provides that out-of-court restructuring schemes should always be 'softer' than in-court restructuring schemes as the latter offer creditors a higher level of protection (especially dissenting creditors). This is because the receiver and the court have a more active role. The three structural changes introduced by this reform are as follows:
– Privileged creditors (including secured creditors) can be crammed-down.
– Claims purchased after the start of the insolvency proceedings do not lose voting rights in a Composition.
– Pre-packs (i.e., the sale of a business as a going concern) are more appealing for potential purchasers of businesses and thus are a very useful tool to allow businesses to continue as a going concern outside an insolvency scenario in a short period of time. This should also lead to an increase in the price paid by the acquirer to the insolvency estate. In turn, this maximizes recovery for creditors. The main new rule to achieve this is the right given to the purchaser of the business to force third parties that are a party to contracts with the insolvent debtor, to continue performing the contract after the purchase of the business. Thus the purchaser subrogates to the insolvent debtor’s position without the consent of the third party.

Finally, other changes have been made in relation to specific insolvencies, such as toll highways, remuneration and appointment of receivers, or extending the number of people and entities related to directors or equity holders (for the purposes of subordination).
My overall assessment of the March (out-of-court restructuring) and September reforms (in-court restructuring) is positive as they create the necessary tools for restructuring businesses either by the original debtor or by a third party that is willing to take over the business.
If the two reforms are not successful in achieving this purpose, it will probably be for reasons other than their technical quality, such as stakeholders’ attitudes, advisors’ knowledge, or implementation deficiencies by the courts and, especially, insolvency receivers. These deficiencies cannot be solved with new legislation but rather by the insolvency industry itself, with everybody striving for excellence together. In this regard, INSOL Europe’s latest project on guidelines and principles for Insolvency Office Holders is the right way to go.